Understanding Financial Reports and the Income Statement - PowerPoint PPT Presentation

About This Presentation
Title:

Understanding Financial Reports and the Income Statement

Description:

Title: Overview of Financial Statement Analysis Author: Preferred Customer Last modified by: Donglin Li Created Date: 10/2/2002 7:49:01 PM Document presentation format – PowerPoint PPT presentation

Number of Views:154
Avg rating:3.0/5.0
Slides: 28
Provided by: Prefer1163
Learn more at: https://faculty.sfsu.edu
Category:

less

Transcript and Presenter's Notes

Title: Understanding Financial Reports and the Income Statement


1
Understanding Financial Reports and the Income
Statement
  • Chapter 2

2
Learning Objectives
  • Income statements
  • Operating and non-operating results
  • Quality and conservatism of earnings

3
A complete set of financial statements includes
  • Balance sheet
  • Income statement
  • Statement of changes in equity
  • Cash flow statement
  • Explanatory notes

4
Generally Accepted Accounting Principals (GAAP)
  • A complete set of financial statements shows
  • Financial position at the end of the period
  • Earnings for the period
  • Comprehensive income
  • Cash flows
  • Investments by and distributions to owners

5
US Securities Regulations
  • Annual report to shareholders
  • Schedule 14A Proxy solicitation materials
  • Form 10K Annual report
  • Form 10Q Quarterly filing
  • Form 8K Current report

6
  • Proxy Statement Table of Contents (edited) 
  •   Voting Procedures
  •   Proposals 18
  •   Ownership of Securities
  •   Executive Compensation
  •   Report of Compensation Committee on Executive
    Compensation
  •   Report of Audit and Legal Committee
  •   Performance Graph
  •   Other Matters
  • APPENDIX
  •   Management's Discussion and Analysis of
    Financial Condition and Results of Operations
  •   Financial Highlights
  •   Financial Statements and Notes

7
  • Form 10K includes
  • Annual report
  • Items included by reference to another report
  • Financial statements included in Proxy statement
  • Discussion of the nature of business operations
  • Geographic locations
  • Stock trading information
  • Auditor information
  • Information on management
  • Other information

8
Auditors Report
  • Unqualified opinion
  • Statements fairly present the the companys
    position or results
  • Qualified opinion
  • Everything is fine except for
  • Adverse opinion
  • Statements do not fairly present the the
    companys position or results
  • Disclaimer of opinion
  • Auditor is unable to state an opinion

9
Of the 4 statements,
  • the income statement receives the greatest
    scrutiny by analysts.

10
(No Transcript)
11
Nokia Consolidated profit and loss (IAS)
12
Sales revenue
  • Proceeds from customers in exchange for the
    delivery of goods or services
  • Also use the terms revenue and turnover (U.K.)
  • Generally recognized when earned and realized or
    realizable
  • When goods/services are exchanged for cash or
    claims to cash
  • Substantially accomplished what must be done
  • Service revenue is recognized with reference to
    the percentage of completion

13
Net sales
  • Sales revenue less returns and allowances
  • Returns
  • Customer returns goods for a refund
  • Allowance
  • Customer retains goods but receive a partial
    refund if unhappy with quality of merchandise

14
Cost of Sales and Gross Profit
  • Net sales Cost of sales Gross profit
  • Cost of sales
  • Direct cost of purchasing or producing the goods
    or services to be delivered to customers
  • Also Cost of good sold or Cost of services
    provided
  • Retail purchase cost of goods sold to customers
  • Manufacturing material, labor and overhead used
    in the production of goods
  • Service cost required to provide service (labor
    and supplies)

15
Gross Margin
  • Gross profit Sales
  • Motorola
  • Margin (30,004-21,445) 30,004 28.6
  • Nokia
  • Margin (31,191-19,787) 31,191 36.6

16
Selling, General and Administrative (SGA)
Expenses
  • Operating expenses including
  • Salaries
  • Pension costs
  • Marketing costs
  • Insurance
  • Rent
  • Depreciation
  • Other
  • Generally reported as a single line item

17
Depreciation
  • Can be a component of Cost of sales or SGA
  • Straight-line depreciation
  • Most common method
  • Annual expense (Cost salvage value) Life
  • Accelerated depreciation
  • Greater expense in early years of assets life

18
Research and Development
  • Searching for new knowledge and translating this
    knowledge into a plan or design for a new process
    or product.
  • Expensed immediately on the income statement
  • Purchased in-process RD appears when one company
    purchases another

19
Restructuring and Other Charges
  • Appears when a business reorganizes
  • Includes charges associated with asset write
    downs and employee separations
  • Be aware whether these charges will continue

20
Operating income
  • Results of primary operations, independent of
    investment, financing and tax expenses

Sales
(Cost of sales)
Gross profit
(S G A)
Operating income
21
Income statement, continued
  • Operating Income
  • Nonoperating income
  • Peripheral activities interest income/expense,
    dividend income, gain/losses on asset sales
  • Income before income taxes
  • Provision for income taxes
  • Expected amount of taxes to be paid
  • Net income or loss

22
Income statement - Special items
  • Minority share of income
  • Subsidiaries owned less than 100
  • Discontinued operations
  • Disposition (actual or planned) of a large
    component of business
  • Extraordinary items
  • Unusual and infrequent
  • Cumulative effect of change in accounting
    principles

23
SFAS 154
  • Retrospective application a change in accounting
    principle is treated by restating comparative
    financial statements to reflect the new method as
    though it had been applied all along.
  • For fiscal year beginning after Dec 15, 2005.
  • To be consistent with IAS

24
Earnings per share
  • Basic
  • Net income/Weighted average number of shares
    outstanding
  • Diluted
  • EPS equation includes securities that can be
    converted into common stock (options)
  • As if dilutive securities were exercised
  • Discontinued operations, extraordinary items and
    changes in accounting principles are shown in
    total and on a per share basis

25
Special revenue recognition methods
  • Long-term contract
  • Completed contract
  • Percentage of completion
  • Warranty contracts

26
Comprehensive income
  • All income statement items
  • Other comprehensive income
  • Change in the value of some securities held for
    investment
  • Gain/losses on foreign currency translation

27
Earnings Quality
  • Earnings that reflect underlying economic effects
  • Earnings that are better estimates of cash flows
  • Earnings that are more conservative
  • Earnings that are more predictable
  • Accounting methods that could affect earnings
    quality
  • depreciation, inventory valuation, revenue
    recognition, assumptions regarding retirement
    benefits, reserves (sales returns, bad debts, etc.
Write a Comment
User Comments (0)
About PowerShow.com